It’s good news on employment - for now

There’s no doubt the labour market has staged a strong recovery, but that doesn’t mean it will be plain sailing this winter, writes Anna Isaac

London’s labour market is taking longer to recover compared to other regions in the UK. (PA)

Payrolls have recovered. Pay is rising. Vacancies have soared to record levels. It all sounds very positive, and it’s definitely not bad news, as the Office for National Statistics Jonathan Athow said: “The overall employment rate continues to recover”.

But there’s a fly in the ointment. For unemployment, this latest data may prove to be as good as it gets, at least in the short term.

These are still not normal times for the labour market. Many workers have steadily slid off the furlough scheme, which was meant to put the labour market on life support during the pandemic-triggered lockdowns. But there were still 1.5 million employees using the mechanism ahead of its closure this month, Athow says. That’s a relatively large number of workers, at a part time, or full-time level, to be without such support all at once.

Even a record number of job vacancies is not enough to allow complacency about the economic recovery. Someone made redundant in the next few weeks has got a better shot at finding more work when there are lots of openings. The problem may be, however, that some of those jobs won’t match up with their skills. If you want a clear signal of some challenges ahead, consider that the government claims to have doubled the number of frontline job centre staff. This mismatch problem, one noted by the Bank of England’s deputy governor, Ben Broadbent, is further complicated by the matter of where those jobs are.

The unemployment rate for the UK has fallen, but it hasn’t fallen by the same amount in every area. London, the South East and Scotland remain as outliers. Unemployment in London is at 6 per cent, above the 4.6 per cent average rate for the UK. That shouldn’t necessarily prove permanent. London’s pace of recovery is starting to pick up, the ONS, noted. Yet the capital’s furlough-sensitive businesses, such as hospitality, remain particularly exposed if, for instance, a sharp rise in hospitalisations were to force the government to mandate working from home where possible.

There was one stand-out devil in the detail from the ONS on Tuesday, too: “All regions saw a decrease in the average weekly hours worked compared with the same period last year”, the bulletin said. While total hours worked picked up after restrictions were eased going into the summer, they remained 45.4 million below pre-pandemic levels at just over a billion hours in May to July 2021. This means that some workers may still be struggling to get as many hours of work as they would like.

Statisticians also warn that pay isn’t likely to be rising as fast as headline measures suggest, because Covid has distorted year-on-year comparisons. At a underlying rate of growth of around 4 per cent, that could get swallowed up by price rises, if inflation, which the Bank of England forecasts could reach 4 per cent by the end of the year, prove persistent.

“The fact that PAYE employment is already back above its February 2020 peak highlights just how remarkable the labour market recovery has been,” explains Ruth Gregory, senior UK economist at Capital Economics. But it will still be a tough adjustment once furlough ends. She expects the unemployment rate to “edge up” from 4.6 per cent to about 5.0 per cent early next year, before it falls again.

There is also a fine balance to be struck between high employment and labour shortages. One is desirable, the other could make the economic recovery unsustainable. There were some concerns that shortages are starting to bite. In July, the economic growth started to slow, slipping to 0.1 per cent, compared to 1 per cent in June.

There is a “real worry” that there “aren’t enough people to fill all the jobs” say Gregory. “It all comes down to how widespread labour shortages become and how long they last.” But, if things go well, and students return en masse to universities, cities could soon find a return of some of the parttime hospitality labour they sorely need, Gregory believes.

According to the UK’s largest business lobbying group, the Confederation of British Industry (CBI), this is already happening.

The “ongoing supply and labour shortages are impeding further growth” says Matthew Percival, director for people and skills at the CBI. And there are immediate steps the government could take, he argues:

“In the longer-term, this means increasing investment in reskilling, automation and improved pay and conditions. But these steps take time to have impact, so we need a functional Shortage Occupation List too so that firms can temporarily fill the most significant vacancies.

“Government needs to immediately begin a review of shortages and accept the Migration Advisory Committee’s recommendations from last year to add extra jobs to the list”.